Drillers give tepid response to record U.S. offshore lease sale

(Reuters) - Oil and gas drillers bid on only a tiny fraction of Gulf of Mexico acreage offered on Wednesday in the largest lease sale in American history, a setback to the Trump administration’s efforts to rapidly pump up investment in the region.

FILE PHOTO: A general view of the Centenario deep-water oil platform in the Gulf of Mexico off the coast of Veracruz, Mexico January 17, 2014. Picture taken January 17, 2014. REUTERS/Henry Romero/File Photo

The Interior Department had offered up a record 77 million acres (31.2 million hectares) for development in the Gulf - an area twice the size of Florida - with discounted royalty rates on the shallower tracts as part of a broader effort by President Donald Trump to ramp up fossil fuels output.

But companies facing multi-billion dollar price tags to develop the acreage and tempted by better terms overseas bid on just 1 percent of the area up for grabs, winning with bids that averaged just $153 an acre - 35 percent below levels last year, and a fraction of those in the region in 2013 when oil prices were higher, according to the data.

In all, the auction yielded $124.76 million in winning bids, slightly more than a smaller Gulf of Mexico auction last year, but a tenth of the amount pulled in during a much smaller lease sale in the Central Gulf in 2013.

The Interior Department’s Bureau of Ocean Energy Management, which administered the auction, characterized the results as robust: “I think we’re seeing continued consistent investment in the Gulf of Mexico,” BOEM spokesman Mike Celata said in a conference call with reporters, adding he forecast increasing oil and gas production from the region for years.

But critics of the administration called the unusually large lease sale ill-timed. U.S. crude oil and natural gas output is already smashing records thanks to improved drilling technology that has opened up cheaper onshore reservoirs, and Brazil and Mexico are also competing for drilling investment in their own deepwater acreage - often with better terms.

“Offering a nearly unrestricted supply in a low demand market with a cut rate royalty and almost no competition is bad policy and an inexcusable waste of taxpayer resources,” the Center for American Progress, a left-leaning policy think tank, said in a statement.

William Turner, senior research analyst at Wood Mackenzie, said the sales statistics were “on par with the all-time lows that we saw last year,” referring to a lease sale in 2017 that had yielded $121 million in winning bids.

Interior Secretary Ryan Zinke had said ahead of the sale that the record-sized offering would be a “bellwether” of industry demand in the region, and billed the effort as a way to help the United States become more “energy dominant.”

“ALL-TIME LOWS?” The U.S. government offers Gulf of Mexico leases annually, but usually in smaller regional batches. An auction in March 2017, for example, offered up 48 million acres in the Central Gulf of Mexico planning region.

Consultancy Wood Mackenzie had expected demand for the acreage to get a boost from higher oil prices compared with a year ago, and lower corporate taxes. But it pointed out interest would be tempered by competition from Latin America, and concerns over the impact that U.S. tariffs on steel imports could have on costs.

The National Ocean Industries Association, which represents offshore drillers, also sounded a note of caution.

“The United States must continue to evaluate how to keep the Gulf of Mexico and other parts of the U.S. outer continental shelf attractive in light of competition from Brazil and Mexico,” it said in an emailed statement.

Drillers have been trying to trim their Gulf of Mexico drilling costs in recent years to make certain projects there more competitive. BP, for example, has said its Mad Dog 2 platform will be economic with crude at just $40 a barrel.

Current oil prices CLc1 are over $65 a barrel.

BP, which bid over $20 million on 27 parcels on Wednesday, structured its bids around its existing production platforms and areas it has already identified as being “highly prospective,” spokesman Jason Ryan said in a statement.

Still, many new projects in the deepwater Gulf of Mexico come with multi-billion dollar price tags and require major investment up front - making them a tough sell.

Some U.S. oil companies like Exxon Mobil Corp (XOM.N) are focusing on new deepwater projects outside of the United States, where royalties and tax structures can be more favourable.

“In terms of Exxon, they have plenty of things to do in Guyana, so why bother getting too active in this round in Gulf of Mexico,” said Lysle Brinker, a research director at IHS Markit, noting Exxon’s absence from the bidding.

In an effort to pump up interest, the Interior Department had cut the royalty rate companies must pay in shallow offshore waters by a third to 12.5 percent, and is considering cutting the rate for deeper waters too.

The BOEM’s Celata pointed out that shallow-water tracts received 43 bids on Wednesday, an increase from past lease sales that he attributed to the lower royalty rates.

The administration is eyeing further vast lease sales offshore in the future, having proposed opening up parts of the Arctic, Atlantic and Pacific - an idea that has faced pushback from several governors in U.S. coastal states.

Democratic lawmakers have also warned the Interior Department not to extend the lower royalty rates to deepwater acreage, saying the move would short-change taxpayers.

Additional reporting by Jessica Resnick-Ault in New York, Valerie Volcovici in Washington and Gary McWilliams in Houston; Writing by Richard Valdmanis; Editing by Marguerita Choy and Paul Simao